Public Bill Committee

[Mrs Linda Riordan in the Chair]

Clause 23  - General duty as regards undue preference in the provision of services

Thomas Docherty: I beg to move amendment 140, in clause 23, page 56, line 36, at beginning insert ‘(1)’.

Linda Riordan: With this it will be convenient to discuss amendment 141, in clause23,page57,line2,at end insert—
‘(2) In that subsection, after paragraph (e) there is inserted—
“(f) to secure the provision of services by licensed water suppliers and licensed sewerage suppliers in a manner that is not detrimental to the exercise of the functions referred to in subsection (2A)(b) above.”.’.

Provides reforms to wholesalers with regards the improvement of water efficiency.

Thomas Docherty: Thank you, Mrs Riordan. It is a pleasure to serve under your chairmanship again this afternoon. It is good to see that so many hon. Members have come back from their lunch to join us.
This is a technical but crucial pair of amendments. I will speak to them together, because they fit together. “No detriment” is a phrase that we use a lot in the water debate, so it is perhaps worth me spending 30 seconds explaining it. “No detriment” clauses ensure that the wholesaler is no better or worse off as a result of water efficiency measures undertaken by retailers. The idea is that, at each price review, the regulator sets a fair cost to the wholesaler, bearing in mind the activity of the previous five years.
Perhaps I can look—with your permission, Mrs Riordan—down the road at why that is important. The Government are rightly committed to ensuring that the water industry is resilient against the twin threats of population growth and climate change, but there is not enough work in the Bill to ensure that there is not an accidental and unintended consequence. We have seen significant savings in water usage with the Scottish model. Historically, the debate on retail competition has been on bringing down the cost of water usage to businesses, charities and the public sector, but it is right that we also bear in mind the abstraction benefit. In the figures I have seen, which take in the larger part of the sector, the introduction of competition creates a saving of something like 6% or 7% on water usage. Clearly we would all welcome that, particularly given the debate we have had on abstraction challenges.
The Bill, however, provides a perverse incentive that could reduce that potential saving. Some customers might benefit if we allow retailers to supply from a new water source that is cheaper than the current company’s regional average cost, but that might not add resilience or be efficient and might, at least partially, strand incumbent company assets. As we discussed this morning, that would simply increase costs for all other customers, including those in households.
The framework in the Bill will not deliver the aspirations set out in the Government’s “Water for Life” White Paper, paragraph 5.30 of which states:
“The Scottish experience has demonstrated the range of benefits business and public sector customers can get from more customer focused suppliers with an incentive to improve the services they offer. While some have simply looked to reduce their bills through simple measures such as discounts for direct debits or aggregated purchasing; others have benefitted from improved information on their water use which has enabled them to benchmark against others and introduce changes which cut operating costs significantly. Other organisations have been helped by their retail supplier to introduce more innovative measures such as rainwater harvesting.”
That goes back to the points made previously by the hon. Member for Tiverton and Honiton. We agree with the White Paper’s aspiration and think it is admirable. It also states:
“We want to see the market develop so that water suppliers work with their business and public sector customers in England to get the same benefits from a competitive market that Scottish customers already enjoy.”
Labour Members absolutely support that, but the problem is that there is no measure in the Bill sufficient to ensure that we do not get the stranding of assets and the forcing up of costs to customers.
Although I have been in favour of holding the water companies’ feet to the fire when appropriate, it is right that we do not disincentivise wholesalers working with retailers to reduce consumption. The reality is that only new entrants are affected. If Business Stream, for example, were to enter the market in England and found that it could access a cheaper source of water more than that from a current wholesaler, for example Northumbrian Water—I am conscious of not using South West Water as an example all the time—it will want to offer that reduced price to its customers. We all recognise that that is a good idea; it is one of the points of the market. However, there is no incentive to do much better than the incumbent on service or to innovate more generally, which means there is no incentive to provide tailored water efficiency advice, for example, which is beneficial to the customer, but might involve an up-front cost for either the retailer or the customer. That is an obvious discrepancy and we want to work with the Government to tidy it up.
As discussed on Second Reading and in previous debates, the supply of water and sewerage services is predicated on an understanding that such assets have an extremely long life—in some cases, of more than a century—because of the scale of investment required and, if the Committee will pardon the pun, the sunk costs. If the volume of water supplied or treated falls, the costs of maintaining the overall structure are forced up, leading to a lower return on the investment. That creates a disincentive for investment in the market, which is in no one’s interest. The Opposition believe that maintaining appropriate investor confidence is crucial. The Minister has had representations from the experts he brought in from Scotland and many investors have flagged up that live concern. When he responds, I would be grateful if he could explain why the Government have until now—I am sure he will be persuaded after my eloquent speech—not included in the Bill a measure like the amendment.
Scotland has been the base model for this work. One benefit of the Scottish model is that the retailers are free to focus on providing the best service and advice possible to their customers, both on water efficiency and on how to reduce wastage. Business Stream has a contract with East Dunbartonshire council—the local authority of the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for East Dunbartonshire (Jo Swinson)—and is a good illustration. It put meters into all the high schools in that area—seven or eight—and found that six out of seven high schools had fairly standard water usage. However, the usage in one was off the scale. Business Stream was able to say to the local authority, “We think there’s a leak somewhere.” It put a little bit of money into sourcing the leak and fixing it, which saved a significant sum of money in the long term for the local authority, which was good for the taxpayer, and reduced the water requirement.
There is no incentive in the Bill for the retailer to offer such advice. We would therefore be grateful if the Minister looked carefully at the amendment. It is designed to help the Government. I hope we have a shared value in trying to bring people together. We surely want a system in which the retailer and the wholesaler work collaboratively and not in competition. I would be grateful if the Minister took the advice of his independent experts and the representations of the investor community and made this small change to the Bill.

Dan Rogerson: I thank the hon. Gentleman for his amendments. Amendments 140 and 141 would amend a general duty in clause 23 regarding undue preference and discrimination in the sector. They would add a duty on the Secretary of State and Ofwat to secure that the provision of services by licensees does not have an impact on a separate duty on the Secretary of State and Ofwat to secure that incumbent water companies properly carry out their functions.
Amendment 131 would remove clause 23 entirely—I assume the hon. Gentleman has the aim of replacing it with amendment 141.

Thomas Docherty: For the benefit of the Minister, that is entirely correct.

Dan Rogerson: I am grateful to the hon. Gentleman for putting that on the record. Clause 23 provides the Secretary of State, Welsh Ministers and Ofwat with a general duty to ensure that incumbent water companies do not exercise undue preference to themselves or their own retail businesses, associated licensees or other incumbents, to the detriment of new entrant licensees, inset appointees or other incumbents when providing wholesale services.
Undue preference might be demonstrated by an incumbent water company prioritising inquiries or service requests from its subsidiary licensee over those from other licensees, inset appointees or incumbents—for example, a request for a new connection from its own retail business or subsidiary licensee might go to the front of the queue ahead of a request from a licensee or an inset appointee.
The clause introduces the same duty on Ministers and Ofwat to address undue discrimination in the delivery of services by incumbents to licensees, inset appointees and other incumbents. That might involve, for example, an incumbent placing different water quality standards from those it would place on its own suppliers or contractors on unassociated licensees or incumbents, over and above those required by the law. It is essential that those that enter the water supply and sewerage markets have confidence that incumbent water companies act appropriately within those markets and do not use their dominant positions to enable their own retail businesses and associates to undercut their competitors by giving preferential treatment or subjecting them to fewer burdens or lower costs.
The clause complements an existing provision that requires Ministers and Ofwat to exercise their functions under the Water Industry Act 1991 in a manner best calculated to secure that no undue preference or undue discrimination is shown when it comes to the fixing of charges. The new duty will sit underneath the wider duty for Ministers and Ofwat to promote competition in the provision of water and sewerage services where that is in the interests of customers. With the other provisions, clause 23 ensures that Ministers and Ofwat have the tools they need to ensure that new and existing markets work well for customers, and that there is a level playing field in which market participants can operate.
The new duty proposed by amendment 141 would instead require the Secretary of State and Ofwat to ensure that licensees act in a manner that ensures there is no detriment to incumbent water companies when carrying out their functions. We are not sure how that would sit alongside the general duty for the Secretary of State and Ofwat to secure that licensees meet their statutory obligations and the conditions of their licences, given that those will be set by the existing duties on Ofwat and Ministers, as well as the new duty in clause 23.
The proposed new duty would not add anything, but I note that there is a similar duty on the Water Industry Commission for Scotland to secure that its licensees act in a manner that is not detrimental to the exercise of Scottish Water’s core functions. We looked at the explanatory notes of the Scottish legislation to see what that means. They link the duty to market opening and suggest it could possibly be used as a way to require licensees to use a central mechanism to facilitate the exchange of information required when a customer switches to another licensee. The Open Water programme is developing that policy and we are satisfied that it can be delivered through licence conditions and codes, which we have debated.
We have looked at briefing material used by WICS. WICS implies that the “no detriment” duty would prevent licensees’ water efficiency activities impacting on incumbents’ profits. In England and Wales, both incumbents and licensees are under a duty to help their respective customers to conserve water. We are not willing to undermine the market for water efficiency services if that, indeed, is the desired impact. If the amendment were to have such wide or further unforeseen implications, we could put licensees at a competitive disadvantage if a similar duty were not placed on the retail side of the incumbent’s business. Why should licensees be kept under a duty that potentially curbs their water efficiency activities while an incumbent’s retail business is allowed to operate without that barrier?

Thomas Docherty: I have been listening attentively to the Minister. Fundamentally, it sounds as if we are in completely different places. Will he explain why the note he is reading is 180° at odds with what WICS told his officials is the purpose of no detriment, which is to allow water efficiency to be encouraged?

Dan Rogerson: The brief is based on the explanatory notes that accompany the legislation, so I guess we have a difference of interpretation. Given the broad interpretation of the corresponding provision in Scotland, as suggested by the explanatory notes, the amendment creates too much uncertainty and there appears to be scope for it to be applied in a way different from what was originally intended in Scotland, where it originated. We consider that the clause, along with the other existing duties, provides the market in England and Wales with the protection it needs.
I will try to pick up on a couple of the questions posed by the hon. Gentleman. Licensees will operate in only 10% of the overall market, so I would need convincing that the no detriment duty will have a practical effect other than potentially protecting the revenue of incumbent water services. The hon. Gentleman is clearly concerned about asset stranding, but we believe that such concerns are overstated. As I said, only up to 10% of companies’ assets by value will be subject to competition. The changes we made to the Bill after pre-legislative scrutiny are acknowledged by investors and companies as helpful in that regard.
Incumbent water companies will benefit from provision of water efficiency services, because they will not have to invest in new resources. The hon. Gentleman gave the example of Business Stream seeking to provide information because it would be incentivised to do that. In evidence, it said that part of its customer relationship was to pass that information on, and it would seek to work with customers to ensure that they are being efficient.
Essentially, we believe that competition will encourage water efficiency in England and Wales. The system is different in Scotland, and given our different circumstances we do not believe that we have to copy every aspect of that system slavishly and make our system a carbon copy. We are having discussions in the Open Water programme about taking the best of what worked in Scotland and applying that in a relevant way in England and Wales. We feel that we have got that balance right.

Thomas Docherty: I am quite disappointed that the Minister or his officials seem to have made up their mind. They are not listening to the clear advice that they were given. I bring the argument back to his regional company. Both WICS and the investors have warned his officials that without the amendment there will be no provision for a shared understanding of and agreement on how the costs will be met. There will be a bizarre situation in which, if an efficiency on water usage is made, which we would all commend, the wholesaler will be left to pick up the additional burden. The amendment would ensure an equitable arrangement and that the wholesaler is not penalised, because whenever a wholesaler is penalised, that penalty is passed on to its domestic customers and to other customers with the new entrant retailer.
I urge the Minister to look carefully at our amendment. It is offered as a helpful piece of advice. It worked in Scotland and is one of the key reasons why the Scottish market works. If the Minister is unable to listen to the advice of investors and WICS, then I regret that I shall have to divide the Committee.

Question put, That the amendment be made:

The Committee divided: Ayes 7, Noes 10.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Linda Riordan: With this it will be convenient to discuss the following:
New clause 26—Separation of retail and wholesale activities—
‘A company granted a water supply licence under section 17A of the Water Industry Act 1991, prior to Royal Assent of this Act, must establish separate legal identities for its—
(a) retail activities, and
(b) wholesale activities
within one year of Royal Assent of this Act.’.

Requires the wholesale and retail arms of the water companies to be separate legal entities, within a year of Royal Assent.

Thomas Docherty: The Minister has known this debate was coming since he was put on the Front Bench team. It is fundamentally about how we avoid incumbent water companies operating as a cartel to stop the effective functioning of new entrants, and it goes to the heart of the successful operation of the retail market. We heard compelling evidence in the session last week from Dr Kenway in particular, but from others as well, about the 25-year head start that the incumbent water companies will have on any of the new entrants.
Because it is always the right place to start, I will talk about Scotland in just a moment, but first let me say that idea of separation did not just come from the Select Committee, although it is important to remember that the Select Committee recognised its importance. It goes right back to Martin Cave and the Cave review that took place under the previous Government, which first floated the idea of retail competition. It was Martin Cave who recommended the legal separation of the retail arms from the incumbent water companies.
What do we mean by separation? What we need is confidence among both new entrants and customers that the incumbent water company is not giving itself an unfair advantage over new entrants. Let us think about the way the energy market works, taking Scottish Power as our example: its generation arm is held separately from its retailing arm and its grid ownership arm—that is, those who generate electricity are not allowed unfairly to give information to those in the national grid structure and those who sell it on to the customers at the point of the plug. Unfortunately, for reasons that the Select Committee never understood, officials in the Department for Environment, Food and Rural Affairs rejected that obvious approach to the retail market. Actually, I think I do know why they did that, but I will come to that in a second.
In Scotland, given that Business Stream and Scottish Water had an historical, inbuilt advantage, they did not just legally separate their functions so that Business Stream—the wholly owned entity of Scottish Water—put up firewalls; they went a step further and moved their premises out of Dunfermline and across the Forth into Edinburgh. If the Minister has not had a chance to visit Business Stream headquarters, I recommend that he comes to Scotland for a warm Scottish welcome and to see Business Stream and Scottish Water and how they have functionally separated.
Ideally, we would have functional and legal separation, but at this stage I would settle for legal separation, to put provisions in. I suspect that, because the Minister’s civil servants have not changed in the past couple of years, the usual examples will be trotted out about the costs of setting it up and how it is a bit of a pain for the water companies. After all, the water companies only made £1.9 billion pre-tax profits last year, so it would be terribly unfortunate to ask these destitute companies to bear a little bit of cost. Water UK has successfully lobbied DEFRA officials repeatedly on this over a long period. My great frustration with organisations such as Water UK, is that it is not interested in putting the customer first and protecting the new entrants; it is only interested in protecting incumbent wholesale water companies.
The Select Committee debated this matter at some length. The Minister and the hon. Member for Tiverton and Honiton will recall that a key area of contention among the Select Committee members was how we deliver confidence. As I said in the previous debate, we all want a successful, vibrant retail market, but there has to be investor confidence in that. Without the separation of retail and wholesale company arms, it is difficult to see how investors could have the same of level of confidence.
Without statutory separation, officials tend to say, “It’s a bit difficult. Let’s punt it to the regulator to sort out.” The Minister knows that the regulators have urged him to provide for separation and that Scottish Ministers have flagged it as a specific concern. He has been asked to do it, not just by the regulators, the investors and the new entrants, but by Scottish Ministers as well, yet he continues to resist. Even some water companies are now calling for separation. I should be grateful if he reflected, once again, on why, despite that overwhelming wall of representations, he has allowed his officials to be captured by Water UK and a handful of water companies, which, funnily enough, find that it is not in their interest to have good competition, because they got away with poor practices for years.
The Minister’s officials have included cost savings in the document, but WICS calculates that full retail separation could achieve net benefits of between £760 million and £2.5 billion for England and Wales in the first 30 years’ operation. That is real money that could be put back into public services from the public sector, or help small and medium-sized businesses. If we are to make the market work, we have to give people confidence. We cannot have a situation in which the wholesale arm sits on the same floor of the same building as the retail arm, without statutory provision to provide safeguards for the customers.
I hope that the Minister will reflect on this and remember the deliberations of the Select Committee when it came to its conclusions.

Dan Rogerson: It is, as always, a pleasure to follow the hon. Gentleman in his reflections on what the Environment, Food and Rural Affairs Committee had to say. In fact, my recollection is that it talked about functional separation, not legal separation, so he is talking about going a stage further.

Thomas Docherty: I thought the Minister was listening to what I said. I said that the Select Committee had said functional, but I was suggesting that as a first step we should go for the legal rather than the functional.

Dan Rogerson: The hon. Gentleman did make that clear, but the position he advances with his amendments is not the same as that of the Select Committee. That is what I was seeking to emphasise.
New clause 26 would require licensed water suppliers operating under the existing water supply licensing regime to set up legally separated entities for the retail and wholesale parts of their business. I suspect that the intention is to place a requirement to legally separate on incumbent water companies, rather than on the eight new entrant licensed water suppliers. Under the Bill, new entrant water supply licensees will be wholesale customers of the incumbent water companies, so there is no need for them to legally separate.

Thomas Docherty: I could have misheard, but I think the Minister said eight new water entrants. If that is so perhaps he could explain where he could the figure eight from.

Dan Rogerson: Perhaps I will return to that later in my remarks. The figure was passed to me at some point.
Legal separation is generally raised as a way of combating discrimination, but it is by no means the only way. What the amendment might be proposing for incumbent water companies is that two bodies must be created under the single existing statutory appointment and probably under the same ownership. That is already possible, as demonstrated by the joint venture set up by Wessex Water and Bristol Water. The legally separated company provides the customer-facing services while Wessex Water and Bristol Water provide wholesale services.
Ofwat will need to use its regulatory or concurrent competition powers smartly to prevent and discourage incumbent companies from discriminating against new entrants in favour of their own retail businesses, either through the prices they charge or by other non-price forms of anti-competitive behaviour. The Government expect Ofwat or other competition authorities to take firm action where there is evidence of discriminatory pricing or behaviour. The tools at its disposal include the power to require undertakings from market participants to address anti-competitive behaviour; that could include but not be limited to structural changes—in other words it could happen subsequently.

Neil Parish: Is the Minister absolutely convinced that what we are putting in place is robust enough to ensure that where a water company has both a retail and a wholesale arm, it does not cross-subsidise the retail with the wholesale, which would not be possible for any potential new entrant?

Dan Rogerson: My hon. Friend is obviously concerned that we get this right and, as he has been at pains to say throughout, that we are going far enough to do that. The way the Bill has been developed based on what we said in the water White Paper ensures that we have the ability to do that through the regulator. The hon. Member for Dunfermline and West Fife characterises that as, “It’s too difficult. Shove it over to the regulator.” An alternative way to say that is, “We are giving the regulator the powers to do this and we trust them to do it.”

Thomas Docherty: Perhaps the Minister could tell us whether Ofwat asked for that power, or if it asked for a legal separation provision in the Bill.

Dan Rogerson: I suspect that the hon. Gentleman is not entirely wedded to everything that Ofwat has asked for. When we come to sustainable development duties, there might be some variance. Sometimes we take a different view from the regulator about what we are asking them to do, and I suspect he does too.
Water companies and their investors told us that there would be considerable risks to future investment if structural reform was imposed on the sector—I am talking about the consultations on the White Paper. That risk has also informed our approach to retail exits, which the hon. Gentleman also carries close to his heart, whereby a power for an incumbent to exit could be used by a competition authority to require companies to separate only where it finds individual cases of discrimination. We do not want to take risks with a successful model, given the challenges we face in building the resilience of the sector.
In clause 23, we introduce a wide power for Ministers and Ofwat to take steps to address undue discrimination and preference in incumbent water companies’ dealings with other market participants and their own retail businesses and subsidiaries. The hon. Member for Dunfermline and West Fife was keen that we remove that and replace it with his own option. We have now moved on from that. Legal separation helps to address issues of discrimination in competitive markets, but it does not eliminate them altogether; only ownership separation could begin to do that. Given investors’ concerns and the relatively small size of the competitive market, we thought it would be better for Ofwat to work with the incumbent water companies and the licensees on the best way to minimise the risk of discriminatory behaviour.
We do not have representation from Water UK on the Committee, and it has come in for a bit of a hammering from the hon. Gentleman and some of his colleagues, but I think it would be fair to say that it is a representative body, and new entrants are now engaging with it and becoming part of what it does. I suspect that we will see Water UK increasingly representing a range of positions—people who are new into the sector as well as incumbents. The hon. Gentleman seems to feel that it speaks only for the incumbents.
Ofwat has produced a document that lays down the challenge to incumbent water companies to make plans to address discrimination within their businesses. These plans will be tested with at least two licensees. We think that this process deserves to be seen through without imposing irreversible structural changes on the sector.
The figure which the hon. Gentleman was keen to probe during my remarks, that of eight companies, relates to new entrants which currently hold licences. More may emerge and enter the market before April 2017. There are 21 incumbent water companies, and this debate is more about the incumbents. The amendment refers to licensees, and we were pointing to the fact that the drafting of the hon. Gentleman’s amendment would pick up the eight licensees as well as the incumbents, on which he was focusing.
Clause 23 allows Ofwat to address discrimination in favour of an incumbent retail business and subsidiary licensee, which relates to the issues raised by my hon. Friend the Member for Tiverton and Honiton. We believe that the clause we have just discussed provides the powers to address these concerns. On that basis, I urge the hon. Gentleman not to press his new clause to a vote.

Thomas Docherty: I am grateful for that explanation. Perhaps I might offer my opinion that Water UK has been adequately represented in parts of this Bill Committee over the last few days. If I may, first I will pick up on the point about the position of the Select Committee on Environment, Food and Rural Affairs. This is perhaps one of those issues on which I say “potato” but you say “potahto”. The Select Committee actually said that while its preference was for legal separation, if that was not possible, it wanted functional separation.
The Minister will recall that the Committee was actually quite innovative, and said that we should have a lighter-touch regime for companies that voluntarily chose to provide some separation. Before I sit down, I wonder whether the Minister has had any inspiration on whether he is minded to ask Ofwat to consider that approach. It would mean that the hand of Ofwat was lighter on the shoulder of those companies that went down the route of functional or legal separation than on the shoulder of companies that refused point blank to do so. I am disappointed that the Minister is not prepared to listen to not only Ofwat or the Select Committee, but Scottish Ministers, WICS and investors.

Dan Rogerson: I note in passing that from the few occasions when I have seen the hon. Gentleman engage with Scottish Ministers on the Select Committee, it seems that he does not always hang on their every word and seek to deliver whatever they want.

Thomas Docherty: As the Minister knows, I am quite a consensual sort of player. When the Scottish National party very occasionally gets something right, I do not hold its badge against it. In the same way, when the Minister occasionally gets something right, not only will we sit down in shock, but we will help to get the Bill through. This is why we have not opposed every single one of the clauses the Government have put forward. The reality is that Scottish Ministers, as the Minister knows, have made representations and said that this is an area of danger for them because of the impact on industry.
I am disappointed that the Minister has not addressed the investor representations—made directly either to him or to his predecessor, and certainly to his officials—which flag up the need for confidence. This is a fundamental point of disagreement. We want the market to work, and for that there has to be investor confidence. If investors and regulators are asking for something and only a handful of water companies are not in favour of doing it, then I know which side of the argument I want to be on. I will therefore press the new clause to a Division.

Linda Riordan: The question is that clause 23 stand part of the Bill. As many as are of that opinion, say “Aye”.

Hon. Members: Aye.

Linda Riordan: The Ayes have it.

Thomas Docherty: On a point of information, Mrs Riordan—as a new Front Bencher, I am slightly confused—if the Opposition wish to press new clause 26 to a Division either today or later, do we have to vote against clause 23?

Linda Riordan: Having taken advice, the answer is that, if you want to press new clause 26 to a Division, you need to vote against clause 23. I will put the question again.

Question put, That the clause stand part of the Bill.

The Committee divided: Ayes 10, Noes 7.

Question accordingly agreed to.

Clause 23 ordered to stand part of the Bill.

George Hollingbery: On a point of order, Mrs Riordan. I do not intend to cause any trouble at all, but I would just like, for information, to understand the procedure we have just gone through. The Committee clearly voted for clause stand part. Can I be illuminated as to whether or not it formally ought to have been asked of the Government parties whether they were content to take that vote again? I am merely seeking an answer for information purposes, not to disrupt proceedings.

Linda Riordan: It was unclear on both sides what the question was, so, seeking clarification, we took the vote again.

George Hollingbery: I am grateful—I really meant that in the spirit of the free flow of information.

Linda Riordan: Clause 23 and new clause 26 are alternatives. That is why there had to be a vote.

Clause 24  - Strategic priorities and objectives

Thomas Docherty: I beg to move amendment 136, in clause24,page57,line6,leave out
‘may from time to time’
and insert ‘must’.

Linda Riordan: With this it will be convenient to discuss the following:
Amendment 137, in clause24,page57,line6,leave out ‘a’ and insert ‘an annual’.
Amendment 139, in clause24,page57,line8,at end insert—
‘(1A) Following the publication of a statement under subsection (1) the Secretary of State may instruct the Authority to conduct a review of pricing of water.’.

Thomas Docherty: The amendment addresses what happens when Ofwat gets it wrong, perhaps through no fault of its own. The current price review period gives some good examples of what can change, and we heard an excellent speech this morning from my hon. Friend the Member for Leyton and Wanstead on Thames Water’s excess profits in the past year. There is a good reason why Thames Water made so much money.
I will not lecture Members on either side of the Committee about gearing, but Members understand that when Thames Water says to the regulator, “For the coming five-year period we would like to set our prices at a certain level”, part of the working assumption it makes is that it is borrowing money to make investments and will have to repay that money over a certain period at a certain rate. We can all understand how that works and why it is important that Ofwat is mindful of those facts when it sets the figure for the forthcoming price review. I am sure that the Minister will confirm that it is one factor that Ofwat will consider for all the water companies when it sets the price review for the next five years. We see it in the business plans as well.
However, there were particular circumstances in this price review. None of us could have foreseen—frankly, we would not be working in the House of Commons if we had foreseen it—that companies such as Thames Water would end up having to repay their loans at a significantly lower figure than they had anticipated. Thames Water is not unique in this: a number of other water companies found themselves in a similar situation. This is exactly what happens when companies gear up in the way that they did. What makes Thames Water particularly noteworthy is that, unlike many other water companies in England and Wales that found themselves in this situation, it chose not to pass any of that excess profit back to householders. It has simply creamed off all the money into its own pockets, and that is simply unacceptable.
This group of amendments provides a mechanism for the Secretary of State to say, “This is unacceptable; water companies should not behave in this manner,” and to instruct Ofwat to reopen the price settlement. Water companies should not be allowed to cream the money off from hard-pressed householders and businesses and not pass on any of their unforeseen windfall profits. That is the point. We all believe that water companies in the market should be given a certain level of return, but when the return dramatically exceeds what was allowed for, something needs to happen.

George Hollingbery: I am very interested in the hon. Gentleman’s argument and I want to press him slightly. How do we define an unexpected circumstance, and what triggers a review? It is a key question. We would have to define very carefully when it was reasonable to review the circumstances surrounding a factor. Thames Water may have decided—it probably did not—to sell its debt to investors at a certain rate, on the basis that its economic forecast suggested that interest rates might fall. How would his amendment address the clear business risk that Thames Water had calculated—in this case, perhaps correctly? How would he contrast that with what he would probably describe as gouging?

Thomas Docherty: The hon. Gentleman is a thoughtful contributor to these debates, and I recall having a tentative discussion about knowns, unknowns and unknown unknowns. The problem is that he is tempting me to speculate on what an unknown unknown is by asking what an unforeseen circumstance is. I hope that he will understand if I say, very gently, that if I could foresee the unforeseeable, I would certainly be doing a different job.

George Hollingbery: That goes right to the heart of my point. We need to be extremely careful to understand that if the hon. Gentleman’s amendment was passed, we would be trying to judge those unknowns before they happened. We will have to define exactly what we think might be unknown, in order to be fair to investors who have taken a risk investing in the water company.

Thomas Docherty: Perhaps the hon. Gentleman and I have slightly different views of how accountability works with decision making. We had a good example of this issue this afternoon, when the Secretary of State for Defence came to the House to explain a Government U-turn, and 45 minutes before that, we had another Government U-turn. I suspect that there will be a third U-turn later today. When a decision is made, there is accountability: the Secretary of State is brought before a Select Committee or Parliament and has to explain why they made that change.
If I understand the hon. Gentleman correctly, he is saying that we should not give the Secretary of State or Ofwat the power to reopen a price review because we do not know what the circumstances are. That is, if he forgives me, a strange argument. The whole point is that they are unforeseen circumstances. I appreciate that the hon. Gentleman and his colleagues are all in favour of excess profits, but the counter-argument is that if water companies suddenly found themselves in severe hardship, unlikely though that is, there would still be the mechanism to allow us to say, “Frankly, we need to go back and look at whether that investment programme is still deliverable.” That is the point about providing this power through the amendment.
I have an idea of what the Minister’s response will be, if he is not entirely enthusiastic about the amendment. I suspect he might say, “It is for not the Secretary of State but Ofwat to make that decision.” [Interruption.] It sounds, from that muttering, as if I have hit the nail on the head. I am more than happy to listen to what he has to say. If he does genuinely think that it is better for the power to lie with Ofwat, we are happy to reflect on that over the next 36 hours, because there is still the option for a new clause to be tabled.
Fundamentally, the amendment would provide consumers with redress. Thames customers in London and the south-east find that the company is saying, “That is our money and we are not giving a penny of it back to the households,” and Ministers and Ofwat do not have the strength to say, “Enough is enough. We need to put customers first and share some of the unintended consequences.”
We are clear that the amendment would address excess profits. For the same reason, we have capital gains tax: if someone makes a profit that is not due to their earnings, but because they have found themselves in an economic situation where their interest rate is significantly lower than anticipated, that is not due to their skill; that is because of the general state of the economy.

George Hollingbery: I am slightly struggling with—

Sitting suspended for a Division in the House.

On resuming—

Thomas Docherty: As I was saying before I was so rudely interrupted, I will take an intervention from the hon. Member for Meon Valley.

George Hollingbery: I am grateful to the hon. Gentleman. As I understood it, he was developing an idea about measuring the difference between things that are deservedly charged for and money that is saved, and things that are undeservedly charged for, such as interest rate drops and so on, versus cost savings within an organisation. I hope that he agrees that it would be extraordinarily difficult to quantify exactly what is an internal matter that has been derived internally, versus what has been derived externally, and to come to some sort of judgment. It would be enormously bureaucratic and on a one-year cycle. I cannot understand how that idea can have a future.

Thomas Docherty: Let me say two things to the hon. Gentleman. First, I think his constituents and constituents of all those in the Thames Water area would say that it is inconceivable that Thames Water should be allowed to go on price-gouging its customers for five years, without any recourse from Parliament and regulators, so I completely disagree with his point. Secondly, as I expect the Minister will point out to him, Ofwat already has those powers in very limited circumstances, so this is not a leap in the dark; we would not be jumping off the market cliff when we introduced it. I expect that my hon. Friends will make the point that it is simply unacceptable for organisations such as Thames Water to make huge profits, year on year, with no regard to the wider financial environment in which our constituents are operating.
As we said previously in this short, but quite lively debate, Thames must have a duty to reflect on the economic circumstances that face people. I will come back to the point that the hon. Gentleman made. He is absolutely right and has nailed one point: we in the Opposition are not talking about profits that are generated by the company proactively making efficiency savings; or profits from driving down its costs through its own actions. If, for example, it takes genuine steps to reduce bad debt and then says: “We want to keep a portion of that money”, that is a reasonable step. However, when actions are taken that are outside its control and over which it has had no responsibility, and it finds itself making hundreds of millions of pounds in excess profit, I believe that it is right, and I am disappointed that the hon. Gentleman does not seem to agree with me, that some of that money should go back to hard-pressed customers.
We might have a good, lively debate over the next few minutes, and I would welcome the Minister’s thoughts on how he will now listen to customers and put them ahead of the vested interests.

John Cryer: Thank you, Mrs Riordan. It is worth remembering that Ofwat’s primary purpose is to ensure value for money. Looking at the profits in the water industry—and there have been some fairly hefty ones—one would have thought that this would perhaps involve the water companies giving their customers the benefit of the profits that they had made, but that has not generally happened.
To give a few examples: Severn Trent Water has paid out £6.2 billion in dividends; Thames Water, as I said earlier and which my hon. Friend has talked about, has paid out £6.3 billion. United Utilities, in the north-west, has paid out £7.3 billion and Anglian Water has paid out a straight £6 billion. In total, the water industry has paid getting on for £40 billion in dividend payments since privatisation. There are clearly some water companies that are not making the spectacular profits we are talking about, but many others—some of the biggest ones covering some of the largest and sometimes poorest areas of Britain—are making spectacular profits and their customers are not seeing anything of those profits.

Thomas Docherty: My hon. Friend makes a compelling case. Would he be surprised to know that in the Secretary of State’s last letter to water companies, he actually said that this was the greatest success of privatisation in the last 25 years? Does my hon. Friend think that £40 billion profits is what the Secretary of State had in mind?

John Cryer: I would say two things. A lot of people are finding it difficult to pay their bills and are seeing them rise, including Thames customers and many others; and hon. Members on both sides of the House of Commons will find it extraordinary that the Secretary of State makes those sort of claims. I will mention the previous debate on the water industry on 5 November, and quote the hon. Member for Skipton and Ripon (Julian Smith). I was reading his speech—something that I do in an odd moment when I want to read his inspiring and uplifting speeches. In fact, I am thinking of having his collected speeches bound and given out this Christmas as presents.

Andrew Percy: Don’t bother.

John Cryer: I am sorry. Is the hon. Gentleman already giving them out?
The hon. Member for Skipton and Ripon made a powerful contribution to the water debate. Part of the way through his speech he said that the figures from Yorkshire Water showed that,
“it is exploiting my constituents and people across Yorkshire”.
I never saw the hon. Member for Skipton and Ripon as a hard-left activist, perhaps working for the north Yorkshire left auxiliary. I always saw him as a pretty solid right-wing sort of bloke. Before I ruin his career, may I point out to the Whip that I am joking? He is not really a hard-left plant in the Conservative party and, as far as I can see, he tends to have fairly traditional free-market views. However, the behaviour of Yorkshire Water spurred him to say the following in the debate:
“In 2013 it”—
Yorkshire Water—
“made an operating profit of £331 million on a turnover of £936 million. Average increases in bills were 6.6%”—
well above inflation—
“with the average bill being £356. There was a quadrupling of the dividend payment, from £62.3 million to £256 million in the past year. The thing that really sticks in the craw of my constituents is the fact that despite those massive dividends and huge opportunities for its shareholders, Yorkshire Water paid zero tax in the last financial year”.
A number of us have made that point. He went on to say:
“When we compare that behaviour with the behaviour of my constituents, the small and micro-businesses throughout my rural constituency, we see that today’s debate and the one we will continue to have about holding the feet of the water companies to the fire is vital.”—[Official Report, 5 November 2013; Vol. 570, c. 213.]
I think everyone will agree with that. It demonstrates that hon. Members on both sides of the House feel a similar sense of anger and outrage on behalf of their constituents at the naked profiteering of certain water companies.

Mary Glindon: Does my hon. Friend think that the concern felt on both sides of the House is highlighted by the fact that more than 700,000 pensioners and more than half a million families spend more than 5% of their income on water? No wonder there is such concern across the House about the exorbitant money that the companies are making.

John Cryer: I agree completely with my hon. Friend. Those pensioners and families are not just in Labour or other Opposition party constituencies. They are in the constituencies of all the major parties, including those of the Conservatives and the Liberal Democrats. That fact is reflected in the public’s general perception of water companies. The polls show that the public think water companies are profiteering and taking advantage of what they perceive to be a rigged market. They think that companies use complicated taxation techniques to avoid paying their obligations. H Ms on both sides of the House disapprove of that.
That view is reflected in the fact—the Government should take notice of this—that in the last poll that I saw 72% of people said they believed that water would be better off nationalised. Whether hon. Members believe in public ownership, as I do, or in the free market, that is a serious problem for the water companies and the Government. It is not sustainable that 72% of people—in some polls the figure is higher, in others it is slightly lower—have such contempt for the water companies that they think water should be brought back into public ownership rather than remain in the private sector. Many hon. Members strongly believe in the free market, but they should recognise that that serious problem must be overcome by the water companies and the Government.
Finally, we were told for many years that investment in water infrastructure would deal with the many leaks. In 1995, 3,755 million litres of water a day were being lost to leaks. After struggling heroically for nearly 20 years, the water companies have got that figure down to 3,000 million litres a day. That shows that they are not even investing successfully in the infrastructure. What they are investing in is doling out profits and payments. Many chief executives and senior people in the water industry are giving themselves enormous rewards far higher than inflation, which is fuelling the outrage that is felt on both sides on the House. I want to emphasise the fact that it is both sides of the House. Members of all parties have contempt for the way the water companies have behaved. The hon. Member for Skipton and Ripon—I keep using him as an example because he has a very different political view to me—wants to break up the big companies and create more competition. I want to see water brought back into public ownership. But what drives our criticism of the water industry is the same feeling that our constituents are being taken for a ride.

George Hollingbery: Hon. Members can agree that the water industry needs to face up to issues about its profitability, directors’ remuneration and so on. As the hon. Gentleman demonstrated, hon. Members on both sides of the House are concerned about that. I want, however, to concentrate on amendment 136. The truth is that it cannot possibly deliver what the hon. Member for Dunfermline and West Fife wants. In fact, I look on it with horror. I understand its benign intent and I agree with much of what he wants to do, but it cannot deliver. First, the point I made to him earlier must be addressed: what is or is not a reasonable factor? Who decides that? What is an internally generated profit and what is an externally generated profit?

Thomas Docherty: I am listening to the hon. Gentleman’s point, but I suspect it would be for the Secretary of State to determine what a reasonable or unreasonable factor is.

George Hollingbery: That is what the hon. Gentleman’s amendment makes clear. I would say it is beyond the wisdom of Solomon for anyone to do this job with a continually rolling one-year view. In what time frame does he envisage this profit is made—is it in the past year or the future? The amendment does not mention that. At what stage will we see proposals on how Ofwat will be instructed? Will that be for the Committee to do at a later stage, or the Secretary of State? I do not know, as that is not in the amendment and we do not know any of the hon. Gentleman’s answers to those questions.
Ultimately, the amendment would just be a charter for Ministers to interfere and play politics with an industry that is important to all of us and on which all of us rely. It will also be a charter for accountants, bankers and lawyers, who will endlessly get involved in trying to assess what it is that the Secretary of State is trying to get at on such a regular, rolling basis.

Dan Rogerson: My hon. Friend is making an excellent point. In fact, it is slightly worse than that. A Secretary of State who may not want to play politics will be forced into making a statement on an annual basis, so even those who want to allow Ofwat to get on with doing the job will be pulled into doing that.

George Hollingbery: At the very least, we would have to come up with some byzantine and complex metric by which, each year, the Secretary of State would have to measure whether they ought to interfere.

Thomas Docherty: I suspect that the hon. Gentleman was not at oral questions when the Secretary of State trumpeted that he had sent a stiff letter to the water companies. If that is not playing politics, what does he think is?

George Hollingbery: My view is that what the hon. Gentleman proposes would institutionalise the interference; it would set it down in statute that, every single year, the Secretary of State had to stick their finger in the air, try to gauge where the wind was coming from and decide whether to interfere. An extraordinary metric would have to be drawn up and approved by Parliament for that to be judged each time, and I see no proposals in the amendment on how that would come about.
Finally—this is the only point that really matters—it would crucify the fundraising abilities of water companies. They can borrow at the rates available to them because they are utility businesses with a five-year projection that lenders can understand, and they can begin to see their returns over that period. I guarantee that if the amendment were accepted by the Committee and put forward to the House, the share prices and long-term debt ratings of water companies would go through the floor and the amount of interest they would be charged to borrow would go through the roof. That would have an impact on all consumers immediately.
For whatever benefit there may be in punishing or docking the profits of water companies on an ad hoc basis—in fact, the amendment does not explain that one way or another—the only certain outcome would be a great deal of cost for bill payers owing to the increased interest rates faced by those companies. The real advantage that those businesses have at the moment is that lenders have certainty about what they are lending to and what their returns will be, so that they can offer a low interest rate. That will only increase if the hon. Gentleman’s amendment is accepted. I give way for a final time.

Thomas Docherty: I am grateful that the hon. Gentleman gave way, though I think I gave way more often to him.

George Hollingbery: It is only because I am about to sit down.

Thomas Docherty: Does the hon. Gentleman accept that the returns enjoyed by water companies outstrip those of any comparator? Even big retailers such as Tesco or Sainsbury’s make nowhere near that level of return. Has investment in water companies not been a cash cow for years?

George Hollingbery: The hon. Gentleman will know that the reasons those returns are allowed in this monopolistic situation is the enormous investment that is required to ensure that it functions at all. Since privatisation, £125 billion has been funded by the private sector at reasonable rates of interest, because there is certainty.

Thomas Docherty: It is the percentage that is higher. There is a higher rate of return for water company investments than anything else, including retailers and high streets; it is the percentage return that is so ludicrous, and we want a cap on that.

George Hollingbery: I think that the hon. Gentleman understands as well as I do that the levels of return are set by Ofwat. If he has a complaint about the levels of return taken by water companies, he should talk to Ofwat about the job it is doing, and why it is failing so badly at it. I have made my points. The amendment is poorly drafted. The intention is clear, and I understand why the Opposition would want it—

Thomas Docherty: On a point of order, Mrs Riordan. I hope it is not in order for the hon. Gentleman inadvertently to criticise the Clerks for their drafting.

George Hollingbery: As far as I am concerned the amendment is the hon. Gentleman’s. I do not believe that the Clerks are responsible for it. He has tabled it and moved it, so it is his amendment. My opinion as a member of the Committee is that it is poorly drafted and does not include all it should to make it workable. In any event, I think it is unworkable.

Pat Glass: I think there is understandable anger on both sides of the House about the water companies’ behaviour in the past five years. There have been pretty huge profits, dividends and bonuses. Some companies, we have heard, pay no corporation tax and do not intend to pay any for the next 10 years. Bills have increased by more than inflation for most of our constituents.
I take the point that the hon. Member for Meon Valley made about huge investment, but that has slowed down significantly in the past five years. As has been mentioned, 72% of constituents want a return to public ownership in some areas. I do not necessarily advocate that, but there is a problem in the market if 72% of the people who vote for us believe that the market is broken.
It is not fair to consumers when apparently a price review can be re-opened on one side but not the other. The situation has come about because of the recession, quantitative easing and the low interest paid by water companies. In the current price review, that has contributed to huge profits for some water companies—much greater than they, Ofwat or the Government expected.
However, those additional profits have not been passed down to consumers. In fact, for most consumers costs have gone up well above the rate of inflation. Yet companies have attempted to re-open the price agreement —for example, Thames Water has been considering an 11% increase within the current price review.
It seems that the water companies can open the agreement during the price review, but the Government cannot. I understand from the Secretary of State that Ofwat has the power to do it, but clearly it is not doing it. I agree with the hon. Member for Meon Valley; we must wonder what Ofwat is for, if it can allow such price increases and profits and not intervene at all.
My understanding is that what is proposed would not be forced on the Secretary of State; it would simply give him a power. Whether that is the right way to proceed or not, I think that we all recognise that the current arrangement is not working, and are trying to find a way to improve it for consumers.

Dan Rogerson: I thank the hon. Member for Dunfermline and West Fife for the amendments. Their combined effect would be to require Ministers to issue a new statement setting out strategic priorities and objectives for Ofwat each year. That seems excessive, as my hon. Friend the Member for Meon Valley has pointed out.
The Government set out our clear vision for the water industry in the water White Paper. It is a long-term vision and our priorities and objectives for Ofwat are similarly long term. The Government’s principles for economic regulation place a requirement on all the Departments responsible for sponsoring an economic regulator to issue such a strategy and policy statement. However, in view of the importance of regulatory stability, the principles stipulate that those statements should normally be issued no more often than once in a Parliament. We have committed to producing a strategic policy statement for Ofwat on a five-yearly cycle, in line with the price review.
A further effect of the amendments would be to allow Ministers to instruct Ofwat to conduct a price review each year. Again, that seems excessive. It is widely recognised that investors place a very high cost on the risk of political interference in the regulatory regime. It is not a theoretical risk. As we said earlier, a 1% increase in the cost of capital will add £20 to every household’s water bill. The inability to plan effectively for the long term would seriously deter investors and undermine the long-term resilience of the sector. Furthermore, a price review is an intensive process, absorbing significant time and energy that water companies and the regulator might better spend on improving services to customers.
Ofwat already has all the powers necessary to revisit price settlements using the substantial beneficial effects clause in company licences. In some measure, that might reassure the hon. Member for North West Durham.

Thomas Docherty: On how many occasions has Ofwat invoked those powers?

Dan Rogerson: That is interesting, particularly with regard to what the hon. Member for Leyton and Wanstead has said. To confirm, Ofwat has recently concluded a consultation on whether to use the substantial beneficial effects clause in respect of Thames Water. It is now considering whether it will take action on that basis, so the process is in train.
The system has sent out clear signals ahead of the next price review period. In response to that, some companies are saying that they will do better in addressing those issues in the next review period and look at their bills in the last year of the current period. Companies are getting the message, but I accept that we want a regulator that takes its pricing responsibilities seriously. That is why the Secretary of State made it clear in his letter that the Government will expect Ofwat to have regard to that. Of course, Ofwat is taking pricing seriously. The message it has sent to companies is very clear and we are starting to see the fruits in the companies’ responses.
The first concern is that we would risk the investment we have had in the sector. I want to put on record that, when the Secretary of State spoke of the great successes of the industry, he meant not profits, but investment. I accept that the two things might be linked, in that investors want profits when investing in businesses. The key point he wanted to make was on investment in the period since privatisation.
The second concern is the burden. The hon. Member for Dunfermline and West Fife is not worried about the burden on companies—he is quite clear that they have the capacity to deal with it and will just have to get on with it—but there is also a burden on the regulator. We want the regulator to work for the long term. We have mentioned the resilience duty we are introducing. We want a package of measures that enables the regulator to take a long-term view. If there are extreme variations in billing, because circumstances change, Ofwat has the power to do something about it—it is consulting on doing something with regard to Thames Water, a company that many people are concerned about.

Pat Glass: Is the Minister happy that Ofwat has considered intervening only once in five years? Does he believe that that is a huge burden on the companies? Is that good enough for our voters and consumers?

Dan Rogerson: I do not believe that that is a huge burden. The burden to which I was referring was the burden in the amendment tabled by the hon. Member for Dunfermline and West Fife—he wants to confer on every company the burden of taking up annual negotiations and discussions.
I accept that the hon. Gentleman is seeking to ensure that the voices and needs of customers are borne in mind, and that the regulator looks at what might need to be done when market conditions are different from those envisaged at the beginning of the period. Ofwat has the power to do something in such circumstances and, as we have seen, it can take companies’ situations into account ahead of the next price review period.
In summary, the hon. Member for Dunfermline and West Fife has not made the case for his amendments. They would be to the detriment of everybody involved in the process, including, ultimately, customers.

Thomas Docherty: This has been a good debate. It has been lively and we have had a healthy exchange. I congratulate my hon. Friends the Members for Leyton and Wanstead and for North West Durham on standing up for their constituents in two excellent and pithy speeches. I also welcome the contribution of the hon. Member for Meon Valley. I shall respond to a few of the points that have been made, but the Minister is right that we ended up talking about the review amendment and did not spend enough time discussing the statement of priorities.
The Opposition agree that we need to look at Ofwat’s balance of powers. I have a hunch that we will debate some of those duties in a broader sense next week. We believe that the regulator needs to consider the consumer more than it currently does. It will come as no surprise to the Minister that the Opposition believe it is not, and should not be, a purely economic regulator. We believe it has a stronger role in standing up for the consumer, as my hon. Friends have argued so eloquently.
The Opposition and the Government have fundamentally different approaches to the role of regulation. For the market to work effectively for both the producer and the consumer, the right balance must be struck. At the moment, the situation is unequal. I do not believe that lying down and having one’s tummy tickled by the water companies is an acceptable approach to regulation.

Dan Rogerson: The hon. Gentleman rightly seeks to point out differences between the Government and Opposition—sadly, we occasionally differ—but I would highlight the relationship that the Secretary of State and Ofwat have had with companies. A clear framework has been set out by the Secretary of State, Ofwat is taking action on prices, and the companies are responding. We could contrast that with the position under the previous Government, when none of that happened.

Thomas Docherty: Again, if I may repeat the exchanges from this morning, the Labour Government were the only Government to cut prices in a price review. It is disappointing that the Secretary of State has not yet—[ Interruption. ] The Minister seems to be making a sign in the style of someone from “The West Wing”.

Andrew Percy: We heard that in a water industry debate on the Floor of the House. We heard hon. Members shouting about how bills came down, but they went up. There was a small dip, but they went back up, meaning that my constituents, who are Yorkshire Water customers and have many of the problems the hon. Gentleman has described, ended up paying more overall. The statement he is making is not a virtuous one.

Thomas Docherty: I am most grateful, if for no other reason than the hon. Gentleman has demonstrated that, while Yorkshire has some of the finest MPs in the House of Commons, they are not universally fine.
The Minister referred to letters sent by the Secretary of State, which was a central point made earlier by a Government Member. The Government are trying to have their cake and eat it. On the one hand they say that it is fantastic that the Secretary of State has written a letter—one letter—setting out a clear framework. At the same time, the hon. Member for Meon Valley says the Government should not intervene regularly.

Dan Rogerson: Just to help the hon. Gentleman, every five years we have a statement setting out strategic priorities. That is the key point. The recent letter was on the price review period generally. The strategic statement is clear. It will be once every five years, unlike the yearly option. The hon. Gentleman quite legitimately argues for the yearly option, but has failed to make the case.

Thomas Docherty: May I press the Minister on that? I am genuinely unclear. Is he saying that the letter was a one-off and that it was not sent because of the current cost of living crisis? He shakes his head. Was it a one-off letter because the Secretary of State had not spoken to the water companies for some time and wanted to catch up with them, or was it his one letter for the five-year period? I genuinely want to understand what the letter was for.

Dan Rogerson: Again, the hon. Gentleman is not looking at the strategic statement, which is issued once every five years. Any Secretary of State may write to water companies or other people in any sector with which they are connected. That is natural. We do not want full-on, regulatory change every year or a price review every year, which the hon. Gentleman proposes in his amendments. That is the difference.

Thomas Docherty: Perhaps the Secretary of State wrote to the water companies because he had not spoken to them for four months and wanted to catch up and talk about the weather. The reality is that the Minister—inadvertently, I am sure—has misrepresented the Opposition position on the amendment. We are not saying that the price review would be reopened every year. We are saying that, when there are exceptional circumstances, when excess profits are generated not through the work of the water company but because of a broader economic environment—interest rates and the QE process—and when the water companies refuse, as Thames is doing, to hand one penny back to their customers, the Secretary of State should stand up for consumers in that water company area. If Ofwat will not stand up for the consumers, the Secretary of State will.

John Cryer: Will my hon. Friend bear in mind that it was not just that Thames wanted an 11% increase in bills next year, as I mentioned earlier? It also wanted an £80 to £90 flat-rate increase in bills at the same time, and above-inflation price increases for the next five years, after it paid out something like £6.3 billion in dividends. A lot of people would say that that is taking things a bit far. Ofwat has been prepared to intervene only mildly, but it remains to be seen whether it will be successful.

Thomas Docherty: My hon. Friend is right. Some might argue that this is an appropriate debate, because Thames Water is taking the water substances out of its customers through this repeated process. He is absolutely right to highlight Thames Water’s repeated attempts to come back to Ofwat, like poor Oliver Twist, saying “Please Sir—please, Mrs Ross—may I have some more?”
The reality is that Thames Water has returned to Ofwat arguing that there has been a material change. It has tried to argue that the cost of bad service and bad debt has gone up, and that the cost of sewer laterals is new, as if it did not always exist. For those who are unfamiliar, sewer laterals are the small pipes that connect houses with the broader connection. It is taking the proverbial out of customers by saying, in these hard-pressed times, that it wants even more money. Opposition Members have been absolutely firm in saying that that is unacceptable. It is disappointing that the Secretary of State has not shown the same robust level of intervention. He clearly does not want the power to say, “Enough is enough,” when there is a material change to the economic situation.

Dan Rogerson: Let me come back to the point of having a robust regulator to make interventions. The regulator has the power to make such interventions, but the hon. Gentleman is saying that it should be up to the Secretary of State to take a view on a yearly basis. The amendments propose an annual statement—effectively, that is the difference in approach. There would be no decision to issue a statement because the statement would be annual.

Thomas Docherty: As we go on, I hope we can reach a bit more common ground in the spirit of making progress. To clarify, the Opposition say that Ofwat should annually review the pricing structure to ensure that it is what it was supposed to be at the start of the review. However, it would not then vary the pricing structure unless an exceptional change had taken place. I have to keep repeating that Thames Water’s profits last year owed not to its efforts, but to the wider climate. There is no unreasonable burden on Ofwat to monitor such situations. Thames Water, as we have already heard, has asked Ofwat to do that very thing, but it should be doing it at the behest of the consumer, not just at the behest of the water company.
The Minister has mentioned investor confidence. The water market is the cash cow market. He will recall from his time on the Environment, Food and Rural Affairs Committee that, when organisations such as Moody’s gave evidence, they confirmed that the returns have been staggering. We heard numbers from my hon. Friend the Member for Leyton and Wanstead on the size of the profit. No other industry in the last 20 years has made such a return—a 20% return. The return for investors is platinum plated, at the expense of our hard-pressed constituents.
I make two points in closing. There was a very good debate about how we judge the success of a privatised market. I am with my hon. Friend the Member for Leyton and Wanstead: I do not think, as the Secretary of State seems to, that we judge success in terms of the £40 billion that has been taken out of customers’ pockets.

Dan Rogerson: I did clarify that the Secretary of State views success as being the billions of pounds of investment that has gone into the industry, which would not have happened under the previous system. No doubt the hon. Gentleman will now talk about the Scottish case. Under the previous system, we would have struggled to find that level of investment in infrastructure for sewerage and so on in an area such as mine. I am clear that that is what the Secretary of State was talking about. He was also clear that he expects Ofwat to look into and to regulate the price process effectively.

Thomas Docherty: It is quite unusual for a Minister to give the answer for me. He is absolutely right to mention the Scottish model. It is a bit like “Macbeth” becoming “The Scottish play”—we refer to that model constantly now in this debate. We are clear that it is not a good sign of the success of a market when there is such widespread appetite, among the public and elsewhere, for changing the ownership structure. It is a sign that something is failing. We want a successful market. All the amendments we have proposed today, I think the Minister would agree, have been constructive ways to make the market work better, but consumers have to be protected.

Roger Williams: In the discussion of different ownership models, nothing has been said about Welsh Water. There, of course, the issue of distributing dividends to shareholders does not occur because, if there are dividends to be distributed, they go to customers, and if not, any surpluses are reinvested in the company for the benefit of customers.

Thomas Docherty: I am most grateful for that observation. What is great about devolution, and the reason devolution is clearly working, is that we have different models for different parts of the United Kingdom. There is a model in Northern Ireland and a different model in Scotland. It is one of the benefits of devolution in action. It is perhaps something that the Minister and I would agree on.
I am conscious that we still wish to make a lot of progress on the Bill. I have listened carefully to the Minister. In the spirit of not delaying the Committee and of working with him, I will take away his questions about whether it is the Secretary of State rather than Ofwat who should be pulling the trigger on the review and consider whether a new clause on Tuesday might address some of his concerns, so that he can support it. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: Amendment 99, in clause 24, page 57, line 23, leave out ‘and’ and insert—
‘(fa) the NRBW, and’.
Amendment 100, in clause24,page58,line19,leave out ‘and’ and insert—
‘(fa) the Environment Agency, and’.—(Dan Rogerson.)

Clause 24, as amended, ordered to stand part of the Bill.

Clause 25  - Procedure for granting water supply and sewerage licences

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: Clause 25 introduces the procedure for granting water supply and sewerage licences under the new water supply and sewerage licensing regime. The current procedure for issuing water supply licences is prescribed through regulations by the Secretary of State in the Water Supply Licence (Application) Regulations 2005. Clause 25 passes responsibility to Ofwat to determine the relevant procedure for both types of licence, including any fees payable, and to publish a notice outlining that information. The intention is to give Ofwat control over the process of granting licences, rather than set out the procedure in legislation. That will give Ofwat responsibility equivalent to that held by Ofcom in the telecommunications industry. It will also make it easier to align the application process and fees with the relevant procedure in the Scottish market.
Clause 25 also removes the current requirement for applicants who wish to apply for a water supply licence to publish a notice of their application. That means that neither an applicant for a water supply licence nor an applicant for a sewage licence will need to publish a notice of their application. These changes implement a red tape challenge commitment to reduce regulation by repealing the Water Supply Licence (Application) Regulations 2005 by April 2015. Removing the requirement for applicants to publish a notice of their application will remove an unnecessary regulatory burden on new entrants.

Question put and agreed to.

Clause 25 accordingly ordered to stand part of the Bill.

Clause 26  - Extension of time limit for imposing financial penalties

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: Clause 26 extends the time limit for imposing financial penalties from 12 months to five years. It also introduces a time limit for imposing financial penalties where a licensee has failed to achieve a standard of performance. That will apply after the Secretary of State has issued regulations to set standards of performance for water supply and sewage licensees under clauses 29 and 30.
Currently, the Secretary of State, Welsh Ministers or Ofwat have the power to impose a civil financial penalty on an incumbent water company, an inset appointee or a licensee in three cases. First, they can impose a financial penalty on an incumbent water company or an inset appointee for a historic breach of an appointment condition. They can also impose a financial penalty on a licensee for a historic breach of a licence condition. Secondly, they can impose a financial penalty on any of those parties for a historic breach of a relevant statutory obligation. Thirdly, they can impose a financial penalty on an incumbent water company or an inset appointee for failing to achieve a standard of performance. The time limit for imposing a penalty does not apply if a formal notice has been served before the end of the limitation period.
Clause 26 implements a commitment in the water White Paper to extend the time limit for imposing financial penalties. That will remove the incentive for incumbent water companies to delay reporting infringements. Extension of the time limit was also endorsed in David Gray’s review of Ofwat and of consumer representation in the water sector, because it will,
“fully reflect the duration of the contravention and the full extent of any detriment to customers that has occurred across a price review period”.
Clause 26 also ensures that the extended time limit does not apply to contraventions that occurred before the clause comes into force, provided that the contravention is not continuing.

Question put and agreed to.

Clause 26 accordingly ordered to stand part of the Bill.

Clause 27  - Water resources management plans for England: resilience

Amendment made: 101, in clause27,page60,line28,leave out ‘and’ and insert—
‘(da) the NRBW, and’.—(Mr Rogerson.)

Sitting suspended for a Division in the House.

On resuming—

Clause 27, as amended, ordered to stand part of the Bill.

Clause 28  - Frequency of water Resources management and drought plans

Amendment made: 37, in clause28,page61,line5,leave out ‘change’ and insert ‘amend’.—(Dan Rogerson.)

Clause 28, as amended, ordered to stand part of the Bill.

Clause 29  - Standards of performance: water supply

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: Clause 29 will insert proposed new sections 38ZA and 39ZA into the Water Industry Act 1991. It will give the Secretary of State the power to set through regulations standards of performance relating to the water supply services provided by water supply licencees. We have amended the clause to extend the power to Welsh Ministers in relation to water supply licencees that operate in the area of Welsh incumbent water companies, namely Welsh Water and Dee Valley Water. The clause will also extend the requirement to supply information on overall performance levels to Ofwat under section 38A of the Water Industry Act, so it covers water supply licences as well.
Currently, the power to set standards of performance under section 38 of the Water Industry Act apply only to water supply services provided by incumbent water companies and inset appointees. Standards of performance are the minimum levels of service that water suppliers must meet in the normal course of business or when things go wrong. Those standards can relate to the quality of service, as well as to the time it takes to respond to complaints. They may also outline any compensation payable for failing to meet the prescribed standards of performance. In the water White Paper we committed to extending guaranteed service standards to water supply and sewerage licencees. That will ensure that customers who decide to switch will be no worse off than if they decided to stay with the incumbent water company. In any case, we anticipate that increased competition will encourage all market players to provide higher levels of customer service than those laid down by Government.
Guaranteed service standards will also create a level playing field because water supply licencees will be subject to equivalent standards of performance as incumbent water companies. That is important to stimulate competition so the market operates successfully. The clause is therefore vital to ensure the effectiveness of our retail reforms.

Thomas Docherty: We welcome the clause, which goes to the heart of what we are trying to achieve. Using the Scottish model, we have seen great efficiencies. One of the measures of efficiency used by the Water Industry Commission for Scotland is not even that a person has changed their retail supplier, but that the retail supplier has changed his or her attitude. Earlier, we debated the volume of water saved in Scotland. It is worth noting that since the market opened less than a decade ago 16 billion litres of water have been saved. That is one of the great measures that we should use.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.

Clause 30  - Standards of performance: sewerage

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: Clause 30 will insert proposed new sections 95ZA and 96ZA into the Water Industry Act 1991. It will give the Secretary of State the power to set through regulations standards of performance relating to the sewerage services provided by sewerage licencees. We have amended the clause to extend the power to Welsh Ministers in the same way as for clause 29.
Currently, the powers to set standards of performance under section 93 of the Water Industry Act apply only to sewerage services provided by incumbent water companies and inset appointees, as with water supply in the previous clause. The clause is therefore vital and performs a function similar to the previous clause for sewerage services.

Question put and agreed to.

Clause 30 accordingly ordered to stand part of the Bill.

Clause 31  - Notice of agreements within section 142(2)(b)

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: Clause 31 will require an incumbent water company or inset appointee to inform Ofwat when it makes any special charging agreement with a customer. A special charging agreement is an agreement that is not covered by a charging scheme. Ofwat will be able to use its enforcement powers if the incumbent water company fails to inform it of the special charging agreement. The clause also requires Ofwat to include that information on its public register, subject to direction from either the Secretary of State or Welsh Ministers if the information is commercially sensitive.
Currently, an incumbent water company or inset appointee has the power to fix charges for its services using either its charges scheme or an individual charging agreement with the customer concerned. Individual charging agreements allow water companies to offer customers different charges that may or may not involve different levels of service or agreement, such as not to take water at peak times. Individual charging agreements are usually made between incumbent water companies and large users of water. However, they can also be used for other arrangements that are not covered by charges schemes.
The purpose of the clause is to increase transparency around individual charging agreements, particularly ahead of market opening in April 2017. It will provide new entrants with valuable information on future market opportunities. It will also allow other customers of the water company to open up negotiations for a similar charging arrangement if their supply circumstances are similar.

Question put and agreed to.

Clause 31 accordingly ordered to stand part of the Bill.

Clause 32  - Register relating to undertakers and licensees

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: Clause 31 will amend the Water Industry Act 1991 to require Ofwat to enter additional information into its public register. Subject to direction by either the Secretary of State or Welsh Ministers with regard to commercially sensitive information, Ofwat must publish notice of reductions of charges between an incumbent water company and another party payable where someone agrees to reduce pressure on water and/or sewerage networks. The clause concerns agreements on bulk supplies, water supply licensing, main connections and sewerage licensing.
We want to increase transparency around charging. That will provide customers and other parties, in particular licensees, with valuable information on how to receive a discount. Making that information available on the Ofwat website will stimulate a market for water efficiency services and help to reduce waste. Individual provisions will create incentives for customers and new entrants to work with incumbent water companies, to take steps to reduce water usage during peak times or drought and to reduce pressure on sewerage networks during periods of heavy rainfall.
It is right that information on such agreements is publicly available to show best practice and to stimulate the development of new services. Therefore, I call for the clause to stand part of the Bill.

Question put and agreed to.

Clause 32 accordingly ordered to stand part of the Bill.

Clause 33  - Operation of register

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: This is a practised routine, Mrs Riordan. Clause 33 introduces a requirement on Ofwat to publish a notice specifying the times at which its register will be made available for public inspection, along with any charges that may be incurred. The notice must also specify the fees that are payable to Ofwat for producing a certified copy of the papers in the register. Ofwat must ensure that the contents of the register are made available in accordance with that notice.
The clause removes the power of the Secretary of State and Welsh Ministers to issue an order specifying the arrangements that must be put in place to make the register available to the public. It implements a red tape challenge commitment to remove unnecessary regulation by repealing the Director General of Water Services’ Register (Inspection and Charges) Order 1989. The original provision was made before the general public were given rights to request information held by public bodies under the Freedom of Information Act 2000 and environmental information regulations.
The public can now freely access the information on Ofwat’s website, and the clause reflects a similar provision placed on Ofcom to ensure that the public can still carry out a physical inspection of the register and obtain a certified copy of the items included in it. As a non-ministerial Government Department, Ofwat is subject to general Treasury and Cabinet Office guidance on making information available and charging for services. That will ensure that Ofwat sets appropriate fees under the new provisions. I ask that the clause stand part of the Bill.

Question put and agreed to.

Clause 33 accordingly ordered to stand part of the Bill.

Clause 34  - Obtaining information for enforcement purposes

Amendment made: 102, in clause34,page68,line26,leave out paragraphs (b) and (c).—(Dan Rogerson.)

Clause 34, as amended, ordered to stand part of the Bill.

Clause 35  - Appeals relating to revisions of codes

Dan Rogerson: I beg to move amendment 38, in clause35,page70,leave out lines 13 to 16 and insert—
‘(1) Except where otherwise provided, the functions of the CMA with respect to appeals under section 207A are to be carried out on behalf of the CMA by a group constituted for the purpose by the chair of the CMA under Schedule 4 to the Enterprise and Regulatory Reform Act 2013.’.

Linda Riordan: With this it will be convenient to discuss Government amendment 39.

Dan Rogerson: Schedule 6—[ Interruption. ] The hon. Member for Dunfermline and West Fife was prescient in claiming that, from time to time, inspiration strikes me. He can see a little something move across my eyes. There is an aura about me that I am receiving something important. Maybe one of those moments has just arrived.
This group of amendments inserts a provision that requires the chair of the Competition and Markets Authority to set up a specialist panel under schedule 4 to the Enterprise and Regulatory Reform Act 2013 to hear appeals against Ofwat’s decisions to make changes to codes. That replaces a similar provision for the CMA to carry out its functions in accordance with part II of schedule 7 to the Competition Act 1998, which will be repealed by the Enterprise and Regulatory Reform Act 2013 in April 2014 when the functions of the Office of Fair Trading and the Competition Commission are transferred to the CMA. The amendments bring the wording on regulatory appeals into line with provisions for appeals on changes to some energy codes. Those provisions are amended by the Enterprise and Regulatory Reform Act 2013.

Amendment 38 agreed to.

Amendment made: 39, in clause35,page71,leave out lines 23 to 28.—(Dan Rogerson.)

Clause 35, as amended, ordered to stand part of the Bill.

Schedule 6 agreed to.

Clause 36  - Guidance relating to rules about charges

Dan Rogerson: I beg to move amendment 103, in clause36,page71,line33,at end insert—

‘“General guidance on charges’.

Linda Riordan: With this it will be convenient to discuss Government amendments 104 and 105, 144 and 145, and 106 and 107.

Dan Rogerson: We are committed to the provision of a clear policy framework for the developing retail and upstream markets, and to guiding the way in which Ofwat regulates them. We know from experience that prescribing too much detail in legislation can stifle competition and prevent markets evolving. We responded to pre-legislative scrutiny by revising our approach to the ministerial guidance that we will issue to Ofwat about charging matters. With these amendments, Ministers will now have a duty to produce general guidance on charging matters.
These amendments clarify the hierarchy of charging guidance and charging rules that the Bill will establish. They make it clear that the Government’s guidance can cover all charging matters. Ministerial guidance must cover rules relating to water and sewerage companies’ charges schemes—that is, all charges to customers—and charges in the new competitive markets by water and sewerage undertakers to water supply and sewerage licensees. The amendments also make it absolutely clear that where the Government issue guidance, Ofwat must review and, if appropriate, revise and reissue its charging rules.

Amendment 103 agreed to.

Amendments made: 104, in clause 36, page 71, line 34, leave out
‘Guidance relating to rules about’
and insert ‘General guidance on’.
Amendment 105, in clause36,page71,line35,leave out from beginning to end of line 2 on page 72 and insert—
‘(1) The Minister must issue guidance about the principles to be applied by the Authority in determining the provisions of—
(a) rules under section 66E;
(b) rules under section 117I;
(c) rules under section 143B.
(1A) The Minister may issue guidance about the principles to be applied by the Authority in determining the provisions of—
(a) rules under section 40E;
(b) rules under section 51CD;
(c) rules issued in accordance with regulations under section 66M;
(d) rules under section 105ZF;
(e) rules under section 110F;
(f) rules under section 144ZA.
(1B) Guidance under subsection (1) or (1A) may include other guidance about the provisions of any of the rules mentioned in subsection (1) or (1A).
(1C) The Minister may issue guidance about the principles to be applied by the Authority in determining the contents of other documents produced by the Authority about charges that may be imposed by relevant undertakers or water supply or sewerage licensees.
(1D) Guidance under subsection (1C) may include other guidance about the contents of the documents mentioned in subsection (1C).’.
Amendment 144, in clause36,page72,leave out lines 4 and 5 and insert
‘when making rules to which the guidance relates (as well as to any guidance relating to those rules issued under another provision of this Act).’.
Amendment 145, in clause36,page72,line5,at end insert—
‘( ) If—
(a) the Minister issues guidance under this section in respect of rules made under a particular provision, and
(b) the Authority, having regard to that guidance, considers that it is appropriate to revise rules made by it under that provision,
the Authority must issue revised rules under that provision.’.
Amendment 106, in clause36,page72,line6,leave out ‘the guidance’ and insert ‘guidance under this section’.
Amendment 107, in clause36,page72,line19,leave out ‘the guidance’ and insert ‘guidance issued under this section’.—(Dan Rogerson.)

Clause 36, as amended, ordered to stand part of the Bill.

Clause 37  - Exercise of adjudication functions by other persons

Amendments made: 40, in clause37,page74,line46,leave out from ‘exercised’ to end of line 47 and insert—
(i) in relation to a relevant undertaker whose area is wholly or mainly in England,
(ii) in relation to a water supply licensee using the supply system of such an undertaker (see section 17B), or
(iii) in relation to a sewerage licensee using the sewerage system of such an undertaker (see section 17BA);’.
Amendment 41, in clause37,page74,line49,leave out from ‘exercised’ to end of line 50 and insert—
(i) in relation to a relevant undertaker whose area is wholly or mainly in Wales, or
(ii) in relation to a water supply licensee using the supply system of such an undertaker (see section 17B);’.—(Dan Rogerson.)

Clause 37, as amended, ordered to stand part of the Bill.

Clause 38  - Charging of fees by assessors for the enforcement of water quality

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: The clause inserts new section 86ZA in the Water Industry Act 1991. It enables the Secretary of State to confer a power on the chief inspector of drinking water to charge fees to incumbent water companies and licensees for the regulatory activities carried out by the Drinking Water Inspectorate. The measures make similar provisions for Welsh Ministers to confer a power on the designated person in Wales.
The clause replaces a similar power conferred by section 4 of the Public Bodies Act 2011 that was time-limited. It will enable the Drinking Water Inspectorate to continue to recover the costs of its regulatory services from the companies that benefit from them. The amount charged will be set by the chief inspector, approved each year by Ministers and subject to the annulment processes in either House or, in the case of an order made by Welsh Ministers, the National Assembly for Wales.

Question put and agreed to.

Clause 38 accordingly ordered to stand part of the Bill.

Clause 39  - Modification of appointment and licence conditions

Dan Rogerson: I beg to move amendment 146, in clause39,page77,line15,at end insert—
‘( ) References in this section to provision made by or under this Part include references to provision made under section 52 or 53 in connection with this Part.’.
Amendment 146 modifies clause 39 to allow Ofwat to make changes to the appointment or licence conditions of the incumbent water companies and licensees as a consequence of Ministers making an order under clauses 52 or 53. That helps us to deliver our commitment to introduce retail reforms in April 2017 and to delay upstream reforms until after 2019.
The current power to make necessary or expedient changes to appointment or licence conditions under clause 39 only extends to reforms covered in part 1 of the Bill. Clauses 52 and 53 provide powers to make consequential and transitional provision by statutory instrument.

Amendment 146 agreed to.

Clause 39, as amended, ordered to stand part of the Bill.

Clause 40 ordered to stand part of the Bill.

Schedule 7  - Further amendments

Amendments made: 126, in schedule 7,page142,line9, at end insert—
‘(1ZA) Before determining the standard conditions, the Secretary of State must consult the Welsh Ministers as regards conditions relating to a restricted retail authorisation or a supplementary authorisation.’.
Amendment 127,in schedule 7, page151,line31, after ‘1A’ insert ‘of this Part’.
Amendment 128, in schedule 7,page155,line33, at end insert—
In section 47 (conditions of connection with water main), in subsection (1), for “sections 48 to” substitute “sections 49 and”.’.
Amendment 129,in schedule 7, page155,line39, at end insert—
In section 55 (supplies for non-domestic purposes), in subsection (1A)(b), after “17C above) or” insert “, in the case of premises to be supplied using the supply system of a water undertaker whose area is wholly or mainly in Wales,”.’.—(Dan Rogerson.)

Dan Rogerson: I beg to move amendment 162, in schedule 7,page155,line42, leave out from beginning to end of line 16 on page 156 and insert—
‘( ) In subsection (1)—
(a) for “the following provisions of this section” there is substituted “subsections (1A) to (6)”;
(b) after “cut off a supply of water to any premises,” there is inserted “if subsection (1ZA) or (1ZB) applies.
(1ZA) This subsection applies”.
( ) After the subsection (1ZA) so formed there is inserted—
“(1ZB) This subsection applies if a water supply licensee requests the undertaker to disconnect the service pipe or otherwise cut off the supply of water to the premises.
(1ZC) A water supply licensee may make a request under subsection (1ZB) only if—
(a) the occupier of the premises is liable under an agreement with the licensee to pay charges to the licensee in respect of the supply of water to the premises,
(b) the licensee has served notice on the occupier requiring payment of charges due,
(c) the occupier has failed to pay the charges before the end of the period of seven days beginning with the day after the notice was served, and
(d) that period has expired.”
( ) In subsection (2)—
(a) in paragraph (a), for “subsection (1)” there is substituted “subsection (1ZA)”;
(b) in the words following paragraph (b), for “that subsection” there is substituted “subsection (1)”.
( ) After subsection (2) there is inserted—
“(2A) Where—
(a) a water supply licensee has served a notice for the purposes of subsection (1ZC)(b) on a person, and
(b) within the period of seven days mentioned in subsection (1ZC)(c), the person serves a counter-notice on the licensee stating that he disputes his liability to pay the charges in question,
the licensee may not make a request under subsection (1ZB) in relation to the premises except at a time when that person is the occupier of the premises and those charges are enforceable against that person in a manner specified in subsection (3).
( ) In subsection (3)—
(a) after “subsection (2)” there is inserted “or (2A)”;
(b) in paragraph (a), after “the undertaker” there is inserted “or, as the case may be, the licensee”;
(c) in paragraph (b), after “the undertaker” there is inserted “or, as the case may be, the licensee”.’.

Linda Riordan: With this it will be convenient to discuss Government amendments 163 to 165.

Dan Rogerson: The amendments amend schedule 7, which includes minor and consequential changes to the now-famous Water Industry Act 1991 and to other enactments.
Amendments 162 and 163 amend provisions in the Bill relating to the disconnection of premises when the customer has failed to make payments to the licensee. The licensee may request that the incumbent water company cuts off the water supply so that the customer cannot continue running up debts. That corresponds to the existing powers an undertaker has to cut off premises for the same reasons. The amendments ensure that the water supply will not be cut off if the customer is still able to dispute the debt, or where shared supplies go to other premises served by other licensees. That ensures that customers who pay their debts are not denied a supply because of a defaulting customer’s failure to make payments. The existing protections for certain premises, such as homes and hospitals, are preserved.
Amendment 164 picks up a long-standing error in section 219 of the 1991 Act, where the definition of protected land should refer to section 217, not section 218. Amendment 165 amends the transfer of functions order that transferred some of the Secretary of State’s functions under the 1991 Act to Welsh Ministers. The term “licensed water suppliers” is changed to “water supply licensees”.

Amendment 162 agreed to.

Amendments made: 163,in schedule 7, page156,line27, at end insert—
‘( ) In subsection (5)—
(a) in paragraph (b)—
(i) after “those premises” there is inserted “(“the primary premises”)”;
(ii) after “other premises” there is inserted “(“the secondary premises”)”;
(b) in the words after paragraph (b)—
(i) for “those other premises” there is substituted “the secondary premises”;
(ii) for “the premises in relation to which the charges are due” there is substituted “the primary premises”;
(iii) for “the other premises” there is substituted “the secondary premises”.
( ) After subsection (5) there is inserted—
(6) The undertaker may not cut off the supply to the secondary premises in reliance on subsection (5) if—
(a) in a case where the undertaker is exercising the power in subsection (1) because charges are due to it, the secondary premises are supplied by a person other than the undertaker;
(b) in a case where the undertaker is exercising the power in subsection (1) because of a request for disconnection under subsection (1ZB), the secondary premises are supplied by a person other than the licensee which made that request.”’.
Amendment 164,in schedule 7, page162,line18, at end insert—
‘(00) in the definition of “protected land”, in paragraph (b), for “section 218” there is substituted “section 217”.’.
Amendment 165,in schedule 7, page162,line30, at end insert—

‘The National Assembly for Wales (Transfer of Functions) Order 1999 (S.I. 1999/672)
92A In Schedule 1 to the National Assembly for Wales (Transfer of Functions) Order 1999, in the entry relating to the Water Industry Act 1991—
(a) for “licensed water suppliers” there is substituted “water supply licensees”;
(b) for “licensed water supplier”, in each place those words occur, there is substituted “water supply licensee.’.—(Dan Rogerson.)

Schedule 7, as amended, agreed to.

Clause 41  - Withdrawal of compensation for undertakers

Amendments made: 42, in clause41,page77,line37,at end insert—
‘( ) The Water Resources Act 1991 is amended as follows.’.
Amendment 43, in clause41,page77,line38,leave out
‘of the Water Resources Act 1991’.
Amendment 44, in clause41,page77,line41,at end insert—
‘( ) Section 61A (recovery of compensation from new licence-holder) is repealed.’.—(Dan Rogerson.)

Question proposed,That the clause, as amended, stand part of the Bill.

Thomas Docherty: It is worth noting that the Minister has friends in unusual places. The clause has been welcomed by WWF, among others, as a sensible move for ending the process by which compensation is paid at the point at which abstraction ceases. As I understand it, Ofwat now needs to consider abstraction compensation as part of its price review under the five-yearly process. As WWF and others have said, however, Ofwat does not have a great track record of looking at abstraction and sustainability. I hope the Minister realises that when we debate these issues later, the Opposition will be pushing for sustainability to be a primary duty.

Dan Rogerson: I welcome that contribution. The hon. Gentleman is absolutely right to point out that the change has been welcomed, and it is very much a step in the right direction as we embark on the road of abstraction reform. Looking back to our earlier debate about the resilience duty, the provisions will go a long way to ensuring that Ofwat takes into account the whole, balanced picture, given that the environmental resilience of the catchment providing the water is a key consideration. However, as the hon. Gentleman said, I suspect that we will return to the issue in due course.

Clause 41, as amended, ordered to stand part of the Bill.

Clause 42  - Main rivers in England and Wales

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: Clause 42 replaces a number of sections of the Water Resources Act 1991 that make specific provisions for England and Wales. It transfers responsibility for maintaining the main river map for England from the Secretary of State to the Environment Agency, and for Wales from Welsh Ministers to Natural Resources Wales. That reflects the already major role of those organisations in maintaining and updating the maps. They will be required to consult on proposals to change the status of a river from an ordinary watercourse to a main river, or vice versa, and there will be a right of appeal to the Secretary of State and Welsh Ministers to ensure a transparent and fair process.
To reflect the increased use of geographical information systems and the ease of information transfer that such systems offer, clause 42 changes the requirements for a paper definitive map to an electronic one. Flood risk management authorities and navigation authorities will be entitled to free copies of the map relevant to their area or district. I commend clause 42 to the Committee.

Thomas Docherty: I have given the Minister advance notice that he might need inspiration. I am sure that all Committee members have read the very helpful Library research paper that makes the point that clause 42 will make the Environment Agency responsible for river maps, as the Minister said, but clause 43 will mean that it no longer has to maintain maps of pipes and waterworks, which seems at first glance to be counterintuitive. Will the Minister explain why two different approaches to maps are being taken?

Dan Rogerson: We will look at this issue further when we debate clause 43, but main river maps determine whether a watercourse is a main river or an ordinary watercourse for flood risk management purposes. Such maps are still required. Clause 43 repeals the Environment Agency’s duty to keep maps of water mains. That information is maintained through other means and there are no records of requests to access it. The clause therefore removes a small duplication of effort by the agency.

Question put and agreed to.

Clause 42 accordingly ordered to stand part of the Bill.

Clause 43 ordered to stand part of the Bill.

Clause 44  - Regulation of the water environment

Question proposed, That the clause stand part of the Bill.

Linda Riordan: With this it will be convenient to discuss new clause 35—Onshore oil or gas activities—effect on water environment—
‘In Part 1 of Schedule 5 of the Environmental Permitting (England and Wales) Regulations 2010 there shall be inserted after paragraph 13 the following—

“Onshore oil or gas activities—effect on water environment
13A (1) Without prejudice to the operation of Regulation 35(2) and paragraph 5(1)(d) of Schedule 10 and of Regulation 35(2) and paragraph 7(j) of Schedule 20, the regulator shall refuse an application for the grant or variation of an environmental permit or for the transfer in whole or in part of an environmental permit if—
(a) the regulated facility to which the application for or transfer of the environmental permit relates is to be carried on as part of an onshore oil or gas activity; and
(b) the regulator is not satisfied that the applicant or the proposed transferee has made or will make adequate financial provision for preventing or mitigating pollution of the water environment, by ensuring all of the following—
(i) operation of the regulated facility in accordance with the environmental permit;
(ii) compliance with any enforcement notice or suspension notice or prohibition notice or mining waste facility closure notice or landfill closure notice which may be served on the applicant or transferee by the regulator under these Regulations;
(iii) compliance with any order of the High Court which may be obtained against the applicant or transferee under Regulation 42 for the purpose of securing compliance with any of the notices listed in sub-paragraph (ii).
(iv) compliance with any order of any court issued under Regulation 44 against the applicant or transferee; and
(v) recovery by the regulator of its costs upon any exercise of its power against the applicant or transferee under Regulation 57;
(c) for the purpose of this paragraph ‘onshore oil or gas activity’ means any activity for the purpose of exploration for or extraction of onshore oil and gas;
(d) for the purpose of this paragraph ‘adequate provision by way of financial security’ means financial provision which is sufficient in value, secure and available when required.”.’.

Roger Williams: It is a pleasure to serve under your chairmanship, Mrs Riordan. I seek to take some of the burden off the shoulders of the shadow Minister, who is struggling against a Minister on good form in defence of his Bill, showing excellent defensive qualities.
New clause 35 would amend the Environmental Permitting (England and Wales) Regulations 2010 and introduce a liability guarantee—in other words, a bond—to ensure that fracking companies have the funds available to pay for the cost of the clean-up should an accident occur. Such a precaution is essential to ensure that the public purse is not hit if something goes wrong. Companies involved in fracking have said that the risk of pollution to groundwater is extremely low. We have also heard assurances that our regulatory regime for fracking is the most stringent in the world. If that is true, a bond is not a big issue, but it is important.
It is true that, if properly implemented and enforced, existing regulation could mitigate many of the risks posed by fracking, but we should still plan for the low-probability, high-risk scenario of a pollution incident. The amendment would simply ensure that, if the worst did happen, there was clear liability in place and the cost of clean-up did not fall on the public purse.
New clause 35 builds on the lessons learnt from the experience in the United States, which has shown that there is a need for a strict regulatory regime. For instance, the peer-reviewed study of aquifers in Pennsylvania and New York uncovered convincing evidence of methane contamination of drinking water linked to shale gas extraction. We need to know that provisions are in place for dealing with drinking water contamination. This amendment would also prevent the repetition of past mistakes in the UK. As it currently stands, even if liability for an accident can be proven, there remains a risk that fracking companies will go bankrupt, leaving taxpayers or water companies with a cost.

Thomas Docherty: I welcome the hon. Gentleman to this important debate. He is obviously aware of the Water UK memorandum of understanding that was signed in the past couple of weeks. Does he feel that it is sufficient cover for the issues that he is addressing, or does he have further concerns?

Roger Williams: I am trying to get the Minister’s understanding of that situation placed on the public record. I have some experience in my constituency, not of fracking but of extractive industries that have left areas in a very poor state. For instance, the Nant Helen opencast process in my constituency was given planning permission—initially having been refused by the local authority—by an inspector who put in place no restoration conditions. We are left with a fantastic bit of scenery that is now in very poor condition. I met the commoners recently who find that a third of the area on which they depend for grazing is lost to them, with no hope of restoration in the future. That is not what we want to occur if problems happen as a result of fracking.
Members of this Bill Committee know only too well that we cannot afford to pollute aquifers that are a vital source of water for drinking, for agriculture and for the natural environment. Such a pollution incident could occur, however, due to a fault in the production well, and clean-up would be costly and could take decades. An example of this was referred to by my hon. Friend the Member for Wells (Tessa Munt) on Second Reading. The contamination of a chalk aquifer near St Albans in Hertfordshire in 2000 led to extensive contamination of the public drinking water supply. The cost of clean-up, which took a decade, was in the region of £16 million.
New clause 35 will ensure that if and when fracking goes ahead, there is public confidence in assurances from industry that there is no risk to our water supplies. In the autumn statement, the Chancellor confirmed that the UK will have the most generous tax regime in the world for fracking. It surely stands to reason that companies that benefit stand by their assurances and commit to paying the costs of clean-up if something goes wrong.

Mark Spencer: I rise in support of the amendment in the name of the hon. Member for Brecon and Radnorshire. I support fracking, which has happened in Nottinghamshire for the past 50 years, but it is essential that that very technical process is done by the professional bodies that are good at doing what they do and that we can be assured that it will not lead to the contamination of watercourses.
This amendment allows that process to happen by guaranteeing a bond—a public liability insurance, in effect—to make sure that those companies will pay to mitigate any damage to the aquifers through which they are drilling. This is not new technology. Anybody who lives in Nottinghamshire will know that every deep mine in that county went through the Bunter sandstone, through the aquifer, so it is quite technically possible to go through this process, but we need to make sure that the companies that deliver this technology are sufficiently competent. I think this bond will ensure that those companies are valid and competent so that, to put it in Sherwood language, we do not allow cowboys into the industry who may simply walk away from the damage they cause.

Thomas Docherty: I congratulate the hon. Member for Brecon and Radnorshire on tabling the new clause and the hon. Member for Sherwood on his useful and productive contribution. We welcome the new clause and understand that it is a probing amendment. The hon. Gentleman will probably be more effective than I have been in winning over the Minister. A memorandum of understanding has been reached between Water UK and the fracking industry which Ministers south of the border find acceptable. However, Scottish Ministers have expressed concerns about it. I should be grateful if the Minister could tell us whether the Scottish Ministers have shared those concerns with him.
I suspect that the reason why Scottish Ministers are a lot more concerned than Ministers south of the border is that, to go back to the point the hon. Gentleman made when he introduced his new clause, we have had some quite bitter recent experiences with extractive industries as a whole. Indeed, in my constituency, ATH Resources went into liquidation recently and has left a huge, gaping hole in the ground without a sufficient bond to meet the cost of repairing it. ATH Resources had inherited from Scottish Coal responsibility for maintaining the water table. Without going into the details, there is a long-standing commitment to stop pollution draining off the open casts and the surrounding mines and seriously damaging the water table.
The concern that the hon. Gentleman raises is a legitimate one. If sufficient bonds are not in place, the disasters that we have seen in Scotland with open casts collapsing will be repeated. I hope that will be rare, but it could happen if a fracking company found itself in the same situation. We support the new clause and hope that the Minister can give specific reassurances about the MOU.

Dan Rogerson: I concur with the hon. Gentleman about the helpful contributions from my hon. Friends the Members for Brecon and Radnorshire and for Sherwood. I apologise that he has not yet reached that level of accord with me on so many issues that he can share in the kind message from my hon. Friend. We have more sittings to come and we will see where we get to with that. I may be about to lose my hon. Friend with some of the comments I am about to make, but I hope not.
The new clause would require onshore oil and gas operators to provide financial security when applying for an environmental permit so that funds would be available to deal with any water pollution incident caused by the operator. It would have an impact on both the conventional and unconventional oil and gas services whose activities also have the potential to cause pollution. I would like to make a few key points to explain why the Government cannot support the new clause.
As the Secretary of State mentioned at Second Reading, we believe that the existing regulatory framework is fit for purpose for the exploration and exploitation of onshore oil and gas activities. There are a great number of checks and controls available to us to ensure that operators comply with the requirements of their permits and deal with the wider pollution risks without adding to existing regulation. For example, at the outset of the process for permitting applications for onshore oil and gas activities in England, the Environment Agency carries out an operator competence assessment, which looks at an operator’s financial capacity as well as its technical ability to comply with the permit conditions. These checks have served us well to ensure that only technically competent and financially able companies are allowed to operate in this field. In addition, there are existing requirements for financial guarantees under the mining waste directive for highe- risk extractive waste industries. In the event of serious damage to surface or ground water, the environment agency and Natural Resources Wales already have powers under the Environmental Damage (Prevention and Remediation) Regulations 2009, and the equivalent Welsh regulations to serve a notice requiring that the polluter pays to clear up the pollution.
These powers apply to a wide range of operations and activities undertaken by different industries, and I do not think that it is necessary to create any specific provisions for the oil and gas industry. I hope that I have reassured the hon. Member for Brecon and Radnorshire that his amendment is not necessary, as we already have adequate controls in place to prevent pollution from oil and gas activities, and to ensure that any problems that do emerge will be effectively dealt with and remediated without costs falling on public funds.

Thomas Docherty: Will the Minister give way?

Dan Rogerson: Before I respond to the point on the memorandum of understanding, I will give way to the hon. Gentleman.

Thomas Docherty: Perhaps he is about to come on to this, but I raised specific points about Scottish Ministers and I hope he has had some inspiration to help answer those.

Dan Rogerson: The hon. Gentleman has helpfully informed the Committee that a memorandum of understanding has now been signed by Water UK and the UK Onshore Operators Group. It offers co-operation in a bid to minimise the effects on water resources and the environment from shale gas operations. I hope that the hon. Member feels that the water companies are on a side that he supports and recognises that their key concern in their operations is the water quality, which is ultimately their responsibility as they supply water. They are raising the issues with which he is concerned.
I have not seen the details of the MOU, but I very much welcome the fact that Water UK and the UK Onshore Operators Group will be working together to identify and resolve risks around water. This will provide further reassurance and even greater safeguards to ensure that our water quality is not compromised and that water resources are properly managed as the shale gas industry develops on top of the existing regulation.
On the point about Scottish Ministers, I am happy to look at what I have received and get back to the hon. Gentleman. I have not met or discussed this in person with Scottish Ministers, but I am happy to look into what correspondence we may or may not have received.

Roger Williams: I thank the Minister for his very detailed reply. He obviously has got a good grip of this issue and the concerns that many people have. I am sure that he will be making every effort to ensure that the problems we have pointed out to him do not occur in practice. On the basis of the reply I have had from the Minister, I will not press my new clause.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Schedule 8  - Regulation of the water environment

Question proposed, That the schedule be the Eighth schedule to the Bill.

Dan Rogerson: Any new environmental permitting regulations made under clause 44 are limited to the purposes laid out in schedule 8. This will provide additional assurance that new regulations created will be consistent with existing environmental permitting regulations. Schedule 8 sets out the format for new regulations to follow with respect to the three new permitting regimes. This includes directions on how a permit will operate with respect to authorising, amending and regulating its condition.
The schedule also details the function of a regulator, covering such roles as monitoring, issuing a notice, enforcement and allowing charging on a cost recovery basis for specific activities. The creation of offences is provided for, together with any rights of appeal in respect of actions taken under the regulations. There is also reference to the application of the regulations to the Crown.
Part 2 of the schedule covers supplementary provisions, including the basis for any charges, the range and level of offences applicable, the determination of matters by regulators and restrictions on Crown application.

Question put and agreed to.

Schedule 8 accordingly agreed to.

Clause 45  - Environmental regulation: procedure

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: The clause sets out the parliamentary process to be followed by the Secretary of State and Welsh Ministers when making regulations under clause 44 alone or in conjunction with regulations made under section 2 of the Pollution Prevention and Control Act 1999.
The first set of regulations made by the Secretary of State and Welsh Ministers will be subject to the affirmative resolution procedure. Any subsequent regulations that create an offence, increase a penalty for an existing offence, or amend or repeal any provision of primary legislation will also be subject to the affirmative resolution procedure. Any other regulations made will be subject to the negative resolution procedure.

Question put and agreed to.

Clause 45 accordingly ordered to stand part of the Bill.

Clause 46  - Repeal of certain provisions about culverts

Question proposed, That the clause stand part of the Bill.

Dan Rogerson: Clause 46 repeals sections 262 and 263 of the Public Health Act 1936. Section 262 gives local authorities the power to require the culverting of watercourses and ditches where building operations are proposed. It is being repealed as it does not reflect current policy, which is to address the pollution and not to cover up the watercourse.
Section 263 is being repealed as it duplicates the provisions of section 23 of the Land Drainage Act 1991 and section 109 of the Water Resources Act 1991, so that often owners or occupiers are required to apply for parallel consents from the same regulator.

Question put and agreed to.

Clause 46 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(John Penrose.)

Adjourned till Thursday 12 December at half-past Eleven o’clock.